Ripples effects from slower growth

Most hit are those countries that thrived on China’s seemingly insatiable demand for natural resources. Virtually no continent is being spared, and developed and developing countries alike are facing harsh consequences.

As China developed and built the world’s solar panels, laptops and iPhones, it sucked up oil, iron ore, copper and machinery and bid up the price for those raw materials. “So the end of China’s investment boom means the reverse,” says Patrick Chovanec, chief strategist at Silvercrest Asset Management.

In Asia, Indonesia saw coal exports plunge after China’s economic challenges began to surface last year. Brazil, Peru and Venezuela also have suffered from commodity price collapses.

Careful what you wish for

The campaign against China’s bank [AIIB] is hardly unique. Since the Obama administration came into office, its Asia strategy has been to fear and combat nearly every move by China to flex its muscles, which Beijing has done through aid grants, trade deals, energy exploration, new diplomatic initiatives and military relations with other nations. This anti-China strategy might be one of the only areas of agreement between the president and Republicans.

... But wariness toward China has morphed into a muddled, obsessive and often mindless U.S. policy. It holds that any new Chinese action must be stopped; any new Chinese ally must be won over; any new Chinese ambition must be contained. The administration has become so fixated on countering Beijing that it fails to realize that some of the Chinese actions it is fighting do not imperil the United States’ interests. Meanwhile, the (largely futile) battle doesn’t just alienate allies. It also takes U.S. diplomats, money and arms away from places that truly matter to the United States.

Can low oil prices really be detrimental?

Traditionally, it was taken for granted that a decrease in the price of oil was good news for oil importing countries such as the United States. Consumers, with more money to spend, would increase consumption, and increase output. Energy using firms, with lower cost of production, would increase investment. ... Yet the headlines are now about low oil prices leading to low stock prices. I can think of two potential explanations, neither of them convincing.

First, that very low prices lead to such serious problems for oil producers that this will end up affecting the United States and dominating the scene.

... Second, that the low prices reflect a yet unmeasured decrease in world growth, much larger than is apparent in other hard data, and that the price of oil, like the celebrated canary in the coal mine, is telling us something about the state of the world economy that other data do not. There is no historical evidence that the price of oil plays such a role. But suppose, for the sake of argument, that, indeed, the low price told us that China is really slowing down. (The fact that non-oil commodity prices, for which China plays a bigger role than for oil, have decreased much less than oil does not support this interpretation.) Then, we would be back to the previous conundrum. It is hard to see how this could have such an effect on the US economy and in turn on the US stock market.

For a view that the trading patterns do not reflect herding, we only need to open the WSJ:

“Investors are rightly concerned about what a hard landing in China might mean for commodity markets and global growth in general,” said Rebecca O’Keeffe, head of investment at stockbroker Interactive Investor.

Other readings

Bloomberg: Professor Sufi: An Ironclad Rule of Economics Suggests China Is Headed for a Downturn: "China has swapped out a debt-fueled foreign demand binge for a debt-fueled local government spending spree, he said, after which it will be very hard to generate demand. There is a robust statistical relationship between sharp increases in debt to GDP and an ensuing recession, asserted Sufi, and China's rapid leveraging entails that it won't be immune from this ironclad rule."

The Economist: A crisis of faith: “In their response to wobbly markets, China’s leaders reveal their fears”; Once admired for its canny balancing of free markets and party control, China is losing face